mlp - All posts tagged mlp

It’s no secret that the plunging price of oil has hit a lot of energy-company stocks pretty hard. The route has done plenty of damage to master-limited partnerships, or MLPs.

That pressure will continue until oil prices hit bottom, writes Credit Suisse analyst John Edwards in a note published today. Edwards and his team cut price targets on 10 names, and upgraded Energy Transfer Partners (ETP) to Outperform. As he writes:

We expect MLPs to be under pressure until crude finds a floor: Despite the positive valuation indicators based on yield spreads, we expect MLPs to be broadly under pressure in the near term until crude oil finds a floor. In this environment we would expect the more commodity exposed MLPs (read – upstream, gathering and processing, and coal) to be under greater relative pressure. Following the bottoming of crude we would expect, at least among the midstream, to be leaders relative to the names that are more commodity price agnostic. Based on the work of the broader CS Energy Team, we expect crude to bottom some time later in the 1Q, most likely in March as refineries are in full turn around season, undercutting crude oil demand. The continuing debate is how long crude takes to rebound off of its lows as there is broad agreement that the energy complex is not sustainable at current prices. As cut backs in capital spending bite there will less crude to offset the natural decline rate in the global market which should take the excess crude production out.

“The grinding reality: that the future isn’t quite as bright as needed to get the returns expected,” writes Bob Savage, CEO of Track Research.

The Standard & Poor’s 500 Index declined 0.36%, or 6 points, to 1691.42. The Dow Jones Industrial Average fell 72.81 points, or 0.47%, to 15425.51. The Nasdaq was off 0.25%, or 9 points, to3660.11.

The U.S. crude oil benchmark rose more than 2.6% on the day to just more than $106 per barrel. Gold was up 0.27%, or $3.50, to $1,313.40 per ounce.

But things aren’t all bad. A spate of initial public offerings traded at nice prices Friday. Among them was QEP Midstream Partners (QEPM), an energy master limited partnership. (Press release here). More on IPOs from Bloomberg here.

Also sounding the upbeat drum, Tobias Levkovich, equity strategist at Citigroup, wrote Friday afternoon that the longer-term story for U.S. stocks looks quite favorable, and

News that exploration company Devon Energy will carve out a tax-favored partnership sent the stock lower Thursday.

Devon Energy (DVN) shares were down 1.7%, or $1.01, to $55.63. Oil prices have strengthened and crude was up 86 cents, or nearly 1%, to $94.60 per barrel Thursday. But natural gas futures have moved lower, to $3.85 per million British thermal units, down 15 cents or 3.8%.

Roughly 60% of Devon’s reserves are natural gas, according to IHS Herold data collected for a 2012 review. Based in Oklahoma City, Devon has a market value of more than $22 billion. It is focused on oil and gas exploration in the U.S. and Canada, having sold its remaining offshore and international assets in 2009.

Devon said it would sell gas gathering and processing assets in Texas, Oklahoma, and Wyoming into the master limited partnership structure, otherwise known as an MLP. MLPs don’t pay corporate taxes and distribute most of their cash flow to owners of MLP units, as shares are called. MLPs these days are paying average yields of about 5.6%; Devon pays a yield today of 1.5%.

The new entity would initially own a minority interest in Devon’s midstream businesses. Devon itself would own the MLP’s controlling general partner and all incentive distribution rights. That entitles it to a rising share of distributions, as MLP dividends are called. Gimme Credit saw the move as positive, writing that Devon:

“believes it could (ultimately) realize $300-500 million of proceeds from an MLP. The MLP returns capital to Devon for redeployment in exploration and production activities (reducing external financing requirements), and also establishes a second balance sheet for midstream capital raising activities.”

Devon said in a prepared release that the partnership will register with the Securities and Exchange Commission in the third quarter; an offering of units would follow registration.

Devon has been buying back shares and raising its dividend in subsequent years. Devon’s corporate timeline shows growth through acquisition after the company was founded by a father-and-son team in 1971.

Other oil and gas exploration companies were trading higher, including Chesapeake Energy (CHK), Apache (APA), EOG Resources (EOG), Linn Energy (LINE) and Anadarko Petroleum (APC). But SandRidge Energy (SD) was down 1.4% just before the close.

Hurricane Isaac is not only barreling toward Louisiana, it is barreling toward the heart of oil and gas pipelines, refineries, power plants and other energy assets both onshore and in the Gulf of Mexico.

In fact, most exploration and pipeline companies have closed operations in anticipation of the storm striking land this evening. With 79 companies reporting, it looks like most oil production and 67% of natural gas production is “shut in” and workers had been evacuated from 84% of the manned platforms and 64% of the rigs operating in the Gulf of Mexico, according to a Bureau of Safety and Environmental Enforcementpress release.

The U.S. Energy Information Administration offers this cool interactive map that details what assets are where in the Gulf. It even pinpoints assets in the U.S. strategic reserve. Check it out here.

“Highest absolute exposures to Gulf Coast refining are XOM (but low on a global capacity basis), VLO, PSX and MPC: Our two trading long positions into this Q3 were Western Refining and Delek, and they have highest relative exposure. We see the impact of hurricanes as a net positive to refining margins, particularly if an SPR [strategic petroleum reserve] release is triggered, which seems likely.”

New revenue is an obvious boon for the parent. Since MLPs do not pay corporate taxes, and distribute most of their cash flow as tax-deferred dividends, Williams Companies will collect a greater yield following the MLP’s acquisition. Williams Partners estimates 300 trillion cubic feet of natural gas exists within a 35-mile radius of the Caiman Eastern gathering system.

“expects to receive cash distributions of approximately $1.5 billion from Williams Partners in 2014, a 65-percent increase over the approximately $910 million it received from Williams Partners in 2011.”

While the parent is infusing $1 billion into its MLP, in exchange for shares, to fund the acquisition, Williams Partners units, down $1.18, or nearly 2%, to $59.88, are off. It cut its earnings guidance following the announcement. The MLP is issuing shares in addition to cash paid to Caiman for the purchase.

Williams Companies said it will

“purchase approximately 16.3 million Williams Partners limited-partner units at a price equal to the price of the units Williams Partners will issue to Caiman” and referred to the MLP’s press release on the deal.

Kinder Morgan Energy Partners, an energy master limited partnership, was among the losers in the oil patch after parent Kinder Morgan said it would sell MLP assets to gain regulatory approval of its El Paso acquisition.

Shares of Kinder Morgan (KMI), the parent pipeline operator based in Houston, rose 9 cents, or 0.26%, to $36.09. Units of Kinder Morgan Energy Partners (KMP), the MLP, fell $1.48, or 1.78%, to $82.394. Shares of a third, related Kinder entity, Kinder Morgan Management (KMR) fell 82 cents, or 1.06%, to $76.36. The parent pays a yield of 3.4%, while the MLP pays a largely tax-deferred yield of 5.4%. The third enterprise doesn’t pay a cash dividend, but it does pay a distribution in the form of shares.*

Shares of El Paso (EP), which also operates a pipeline limited partnership, rose 29 cents, or 1%, to $22.80.

In a prepared release, Kinder Morgan said it reached a “verbal tentative agreement with the Federal Trade Commission” to divest gas pipeline, natural gas processing and treatment facilities including a 50% interest in the Rockies Express Pipeline.

Kinder CEO Richard D. Kinder said,

“The amount of divestitures is reasonably consistent with our original financial model. We are very excited about the 43,000 miles of El Paso natural gas pipelines that we will be adding.”

U.S. oil prices were little changed on the day, at $105.36, down 7 cents, or 0.07%, after recovering from the midday dip on rumors about a UK-U.S. deal on strategic oil reserves. The Obama administration denied any agreement, we noted on the Focus on Funds blog earlier today.

Among the big oil names, ConocoPhillips (COP), was off 89 cents, or 1.15%, to $76.73. Chevron (CVX) shares declined $1.15, or 1.03%, to $109.54; regulators in Brazil indicated a leak appears to be from the ocean floor, not a sealed Chevron well. Shares of ExxonMobil (XOM) stock was down slightly.

* Clarification: In a previous version of this post, I said Kinder Morgan Management doesn’t pay a dividend. It does not pay a cash dividend, but does pay a distribution in shares, as clarified in text above. See company fact sheet.

About Stocks To Watch

Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.